During the Winter Olympics in February, the People’s Republic of China availed itself of the opportunity to illustrate what it can do with money: it showed off its central bank digital currency (CBDC) incarnation of the yuan.
China required visitors to the Games to pay for meals, hotels, and so forth by means of QR codes on mobile phones linked to digital yuan accounts.
A movement toward the digitization of the euro at the hands of the European Central Bank is also well underway, and a movement toward the digitization of the dollar by the Federal Reserve is at least a probability.
As James Rickards wrote recently for The Daily Reckoning, “[A] CBDC is not a new currency. It’s just a new payment channel. A digital dollar is still a dollar. A digital euro is still a euro. It’s just that the currency never exists in physical form. It is always digital, and ownership is recorded on a ledger maintained by the central bank.“
Some readers may not see the rise of CBDCs as an especially newsworthy prospect. After all (they may think), the average consumer in developed economies already uses electronic means to change the digits in a lot of databases routinely. For instance, you may buy socks by swiping a plastic card. If it’s a credit card, the swipe increases the amount of the buyer’s debt to the company that issued it. If it is a debit card, the swipe decreases the size of the buyer’s bank account. Either way, no physical cash has changed hands, though the socks have been sold. In an important sense, then, money has long been digitized.
The reason why these developments (in China, Europe, the U.S., and elsewhere) are worrisome, though, is that CBDC goes far beyond the digitization of money. It involves centralized and opaque control of those digits. It is a push to put an unprecedented level of power in the hands of central banks. Furthermore, as we shall see shortly, CBDC is bound up with the stigmatization of savings.
The Surveillance State
CBDC matters, and it is frankly alarming, in the first instance, because with the advent of a CBDC run out of the central bank—let us say, the Federal Reserve—the central bankers will have disintermediated the whole of the banking and credit card industries. Everything will be run through the Fed with a single account for payments and receipts.
The surveillance state will have won.
This sort of development is precisely the sort of thing against which precious metals have long been thought to be a bulwark. Oh, yes, the usual arguments for possession of gold and silver are that they help you hedge against inflation and diversify your portfolio. Those are perfectly good arguments.
However, one school of thought has long held that there are deeper threats to which the continued presence of a private sector trade in precious metals is a bulwark. There are threats to the whole idea of private savings at play. That current of opinion, long derided by “mainstream” pundits as survivalist melodrama, clearly has some merit.
Alex Gladstein put the point well in a single tweet.
Gladstein is the chief strategy officer at Human Rights Foundation, a pro-cryptocurrency group that sees financial freedom as a critical human right. He tweeted a year ago that the introduction of CBDCs “makes censorship and blacklisting easier, helps to activate forced spending and negative interest rates, kills privacy and freedom preserving cash, and creates a much more effective and unencumbered surveillance state.”
Nothing that has happened in the last year has alleviated those concerns.
CBDC Before and Through the Pandemic
It was in 2019 that the Bank of International Settlements published what has since stood as an influential discussion of CBDCs. The BIS found that half of the central banks it surveyed reported that they were “looking at both wholesale and general-purpose CBDCs” and that 40% had progressed from “conceptual research to experiments.”
In a lot of ways, the world looks much different now than it did in 2019. A new U.S. president, a war in Ukraine with enormous implications for global markets, the coming and (for the most part) the fading of a global pandemic, the fall of an administration in London, and much else separates that year from ours.
Yet, a bandwagon has rolled on at least since the BIS publication appeared. As usual, the news that everybody is doing X has helped to advance the process in which everybody picks up on doing X.
In 2020, France and South Korea explicitly began experimenting with test-use cases for CBDCs.
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In October 2020, the ECB issued a detailed report explaining why a CBDC may be necessary for Europe, and it promised to hold public consultations on the idea. That may have sounded tentative, but the ECB has since gone a good deal further.
In June 2022, Fabio Panetta, a member of the ECB’s executive board, outlined to a committee of the European Parliament the board’s plans for a digital euro as something that “could be used for any digital payment, would meet Europe’s societal objectives, and would be based on a European infrastructure.”
In April 2021, the Bank of England and Her Majesty’s Treasury announced a joint task force to look into the possibility of a CBDC there, one soon cutely called “Britcoin” by the press.
President Biden and the U.S. Treasury
On March 9, 2022, U.S. President Joseph Biden signed an executive order on “ensuring responsible development of digital assets.” Among its other bullet points, the order called for the “exploration” of the “technological infrastructure and capacity needs” for a potential U.S. CBDC that would “protect Americans’ interests.”
In early July, the Treasury issued a report filling in some of the gaps in that executive order. The Treasury is now on board with a broad international move toward CBDCs with the goal of countering the “illicit finance and national security risks posed by misuse of digital assets.”
When does finance become “illicit?” The question brings us back to the Gladstein tweet. The underlying premise is now that there is something suspect about the very fact of saving. Thus, the powers-that-be look to “activate forced spending and negative interest rates.”
Nothing that has happened in the year since Gladstein wrote those words has alleviated his concerns.
Let us look further into the issue of negative interest rates. The term means what it sounds like it means. The Riksbank of Sweden announced in 2009 that it would charge banks to hold deposits. In effect, then, it was charging them for a failure to put the money to work. That, of course, was a response to the global financial crisis then bottoming out.
Others have repeated the experiment in other forms since. The central bank of Denmark in 2012 set its key policy rate in negative territory.
Once the use of a CBDC is widely accepted throughout a society, its use must ease the implementation of a negative interest rate policy. The central bank, as the focal point of all financial transactions in such a system, can then by fiat make holding cash reserves costly.
It is a truly perverse policy idea, and such experiments as have been done along these lines have been unsuccessful. They are, by definition, disastrous for savers. That is one of the central purposes, after all: to stigmatize saving as “hoarding.”
A Final Thought
Some political pushback against such plans may be developing at last. How far or fast the U.S. will move toward CBDC and/or negative interest rates is known only to those with properly functioning crystal balls.
Still, the prospect is sufficiently real to make a clear case for the ownership and physical possession of precious metals. With gold and silver, at any rate, holders know they have savings that have no digits, that can never be erased or reduced by a central bank’s computer.
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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.
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